Hi there. I have the SX170, which has the aperture range of 3.5 - 8.0 (W) and 5.9 - 8.0 (T).

Since CHDK allows me to set it to 2.8 (there are even some negative values to choose!), is that setting actually possible? Or 3.5 is the hardware limit?

The lower (larger aperture) limit in the Canon specs is almost certainly a hardware limit, because a "faster" lens would be a big selling point for Canon. Overrides higher than canon spec have been reported to work on some cameras, e.g you might be able to go to 16 at max zoom. The Canon firmware doesn't expose that option because it's not very useful.

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Sounds noobish, but I'm afraid I'll damage the aperture mechanism if I set it below or above its designated limit.

We can't answer that with certainty. I'm not aware of anyone who has damaged a camera with aperture overrides, but you could always be the first

Yes, these values are in Enhanced Photo Ops > Av Override. I'm using nafraf's pre-alpha port (1.3.0 / SX170 / 1.01a), which should be released as alpha to Autobuild any day now, since the RAW problems are fixed.